February 17, 2015

ESMA invited comments on the technical standards for reporting under article 9 of EMIR. I sense that amongst corporate practitioners there is a profound sense of weariness – a weariness borne not just out of the volume of work created for them but also the sheer frustration of dealing with the uncertainties and inconsistencies that dog the implementation of at least the trade reporting aspects of EMIR.

That volume of work is incidentally (and in my view) contributing neither to the greater good of treasurers, their employing organisations nor I suspect regulators.

But the EACT does not allow itself to become weary and in our response to ESMA we make two fundamental points: that there should be sufficient lead time to implement future changes in reporting requirements; and that reporting should be focused on areas of increased inherent risk and exclude transactions that are not systemically risky.

On the first point we highlight the problems caused by the rule changes and adaptations that are still being made. We argue for a stop to future large scale reporting changes, for proper time to allow trade repositories to test enhancements etc. We also stress that new reporting requirements should apply only to new transactions and not to those previously reported but not reconciled.

For the second point we return to the core issue of the need for an EU wide exemption of intragroup transactions and for clarification of the scope of an FX derivative to exclude FX contracts used for commercial/hedging purposes by corporates.

The elephant in the room here is of course the question as to whether the panoply of derivatives regulation as applied to corporates (ESMA’s non-financial counterparties) is actually contributing to a reduction in systemic risk linked to the financial sector. Since the beginning of the regulatory tsunami in 2009 I have argued that the proposals for derivatives were fundamentally misguided to the extent that civil servants, politicians and regulators believed that the corporate sector is a real source of systemic risk.

All of which brings us to EMIR v2. I’m sure there will eventually be an EMIR v2 even though it is already behind schedule. The EACT’s shopping list will include the exclusion of intragroup transactions, a switch to one-sided reporting and above all a better coordinated and consistent global approach. One can only dream.

March 12, 2014

After being heavily involved from the beginning in the lobbying over what became EMIR in Brussels, defending corporates’ use of derivatives for hedging, I thought that with the adoption of the Regulation and the Regulatory Technical Standards the biggest hurdles could have been behind us. As the reporting start date of 12 February came closer it however became clear that the EMIR saga was far from being finished and that there were still some chapters in reserve. It seems that despite the year and a half since the entry into force of EMIR nobody was really ready for the reporting: ESMA, national supervisors, trade repositories, banks and non-financial counterparties still had far too much to digest on their plates at the eve of the reporting start date. Words like “mess” and “chaos” predominated in the way corporates described the outcome.

Finding the culprit will not help the corporates struggling with ongoing implementation issues but some general reflections on what went wrong might serve for the future.

Firstly, it is quite clear that 90-day lead-time to reporting start from the approval of the first trade repositories simply disregarded realities and was far too ambitious to allow for a smooth implementation. One of the main issues reported by our members has been the readiness level and the consequential technical and other difficulties of the actors they depend upon, i.e. trade repositories and banks. Also, and not surprisingly, in many cases non-financial counterparties concluded that they were not being given the same level of attention (or priority) as financial counterparties.

Secondly there seems to be a fundamental disconnect between the post-crisis objective of financial system supervisors globally – for which meaningful and standardized data is needed to allow them to keep a watchful eye on risk concentrations and therefore financial stability – and the willful leaving of so many aspects of EMIR unclarified and of course unharmonised. The list is lengthy: the lack of consistency and guidance from ESMA on key reporting elements such as the UTI (where issuing some form of guidance the evening before the start of the reporting can hardly be qualified as helpful), as well as the recent awakening by ESMA to the absence of harmonisation of the definition of derivatives that are subject to EMIR. ESMA’s lack of engagement with non-financial counterparties as financial service users is a whole issue in itself but it has become clear that equipping the parties subject to the reporting obligation with the necessary tools for compliance has been very low on ESMA’s to do-list.

As I write most corporates are still trying to solve multiple issues on reporting and will be doing some for the months to come. At the same time most of us continue to wonder what contribution to financial stability many aspects of EMIR will really make; and we find no less than mind-boggling the prospect of supervisors drawing any meaningful conclusions from the mountains of irrelevant or barely relevant data being reported to them daily by non-financial counterparties.

Right now from corporates’ perspective the cost of implementing and running reporting under EMIR compared to the parlous benefits that all this will bring is simply enormous. Corporate treasurers would be particularly keen to see the two-sided reporting obligation disappear, the reporting on intra-group trades dropped and FX forwards contracted for commercial purposes move outside the scope of the reporting obligation. The recent request from ESMA to the Commission to clarify exactly which FX derivatives are in scope seems to have opened the possibility for the policy-makers to move EMIR into a more reasonable and business-friendly direction; but it remains to be seen whether this opportunity will be used by the Commission. The EACT would naturally favour excluding from the reporting obligation FX forwards that are risk mitigating; such a move would especially benefit the smallest companies that find themselves subject to EMIR reporting. We look forward to the inevitable and necessary reassessment of EMIR, at which time the EACT will again be forthright in highlighting to the regulators why there continue to be so many failings in the current approach. But then that is where we started in September 2009; and look what a battle it was just to get to where we ended up.